* Orient Cement’s Q3FY18 operating performance disappointed, with EBITDA at Rs391mn against estimated Rs772mn and OPM at 7.6% against estimated 14.5%, led by lower realization and higher Repair & Maintenance costs (impact of Rs100-120mn).
* Sales volume was up 9.3% yoy at 1.37mt with capacity utilization of 68.5% (62.6% in Q3FY17). Realization grew by 2.5% yoy (down 6.5% qoq), supported by change in billing method, which gets reflected in 9.1% yoy increase in freight cost/tonne.
* Opex/tn was up 5.1% yoy, led by higher freight cost (due to change in billing method and spike in diesel prices), energy cost (due to higher petcoke price) and employee cost. Higher opex led to 21.5% yoy decline in EBITDA/tn to Rs286.
* Lower realization and higher opex in Q3 are prompting us to cut EBITDA estimates for FY18-FY20E by 13-19%. We remain apprehensive about the company’s acquisition plans - the management expects approval in 3-4 months. Maintain SELL with a TP of Rs147.
Higher opex a drag on operating performance
Orient Cement’s Q3FY18 result was disappointing owing to higher than estimated pressure on cement realization (down 6.5% qoq against estimate of 3.4% qoq drop) and higher other expenses on account of non-regular Repair & Maintenance costs (impact of Rs100-120mn). Pressure on realization and opex led to EBITDA/OPM of Rs391mn/7.6%, sharply below our estimate of Rs772mn/14.5%. Sales volume grew by 9.3% yoy, as the utilization rate improved to 68.5% from 62.6% in Q3FY17. Realization grew by 2.5% yoy, which was largely supported by a change in billing methods from ex-factory to FoR. Opex/tn was up 5.1% yoy, led by a 12% yoy increase in energy cost (increase in petcoke price), a 9.1% yoy increase in freight cost (change in billing method and higher diesel price) and a 9.6% yoy increase in other expenses (unplanned shut-downs). Lead distance was below 290km, down~10km yoy. Impacted by higher opex, EBITDA declined by 14.1% yoy and OPM contracted by 233bps yoy. EBITDA/tn was at Rs286 against Rs364/Rs570 in Q3FY17/Q2FY18. Led by lower operating profit, the company reported a loss of Rs177mn against a loss of Rs117mn in Q3FY17.
Downgrade estimates; maintain SELL
We downgrade FY18-FY20E EBITDA estimates by 13-19% due to lower cement price assumptions and increase in the cost structure post the commissioning of new plants (even after stabilization of new plants, opex continues to surprise negatively). Although we expect earnings to improve over Q4FY18-FY20E (led by improvement in cement prices and higher sales volume), we remain concerned about the company’s intent to acquire cement assets of JP Associates, which will lead to equity dilution and higher D/E, in our view. The management stated that is awaiting certain approvals, which are expected in 3-4 months. The management also categorically outlined its aim to reach 15mt capacity by 2020, which may further stretch the balance sheet. The stock trades at 13.9x/10.5x/8.7x FY18E/FY19E/FY20E EV/EBITDA. We maintain SELL with a revised TP of Rs147, valuing it at 8x FY20E EV/EBITDA.
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